A lack of liquidity management tools is seen as one of the key challenges to the emerging Islamic finance industry, which has close to $1 trillion worth of assets globally. The religion’s ban on interest rules out most interbank tools.
“The Shariah-compliant facility, which accepts the Central Bank’s Islamic certificates of deposits as collateral, is introduced to provide a source of liquidity to banks,” the central bank said in its circular to banks, which was seen by Reuters.
The new facility is based on a murabaha concept, the circular also showed.
Murabaha is a sales contract, usually employed in commodity transactions, that involves the purchase from an independent supplier which is then sold at an agreed price that includes the institution’s costs plus additional profit.
In November, the UAE central bank launched auctions of Islamic certificates of deposit, which saw volumes increasing steadily. Banks held 12 billion dirhams ($3.3 billion) worth of the certificates in April, some 10 percent of the overall volume, central bank data show.
“It is a repo with Islamic certificates of deposits as collateral against cash and allows them to free up liquidity when needed,” said an executive at an Abu Dhabi-based bank.
“There is a shortage of liquidity instruments and it is more pronounced on the Islamic side,” he said, asking not to be named.
Islamic finance accounts for around 17 percent of banking assets in the UAE.
The UAE central bank’s monetary policy is limited by its dirham peg to the US dollar. It uses CDs auctions and repurchase facilities among other tools to regulate liquidity in the banking system.
Late last month, the central bank said it planned to tighten regulations on how banks in the second largest Arab economy manage liquidity so they can better cope with future crises.
UAE lenders remain hesitant to lend following Dubai’s $25 billion debt restructuring last year and weakness in the property sector, although deposits stand at their highest level in more than two years as the country enjoys safe-haven status amid unrest in the region.
